Understanding IPOs: From prospectus to participation

The IPO market has been heating up, with a robust pipeline of innovative companies. Investors who want exposure can sometimes request shares at the offering through eligible brokerage programs, or buy shares on the open market after trading starts. While many investors may find a new wave of high-profile debuts exciting, it’s important to understand how IPO participation works and whether it’s right for you.

An initial public offering, or IPO, is when a company sells shares to the public for the first time and its stock begins trading on an exchange. Companies may choose to go public for a variety of reasons, such as to raise capital for growth, create liquidity for existing shareholders, and/or increase the visibility of the company.

When a company is on the verge of going public, the IPO price is set before regular trading starts—but once the stock begins trading, the market can quickly push the price higher or lower based on supply and demand. That early repricing is part of what makes IPOs so closely watched—by both long-term investors looking for growth potential and active traders looking for big volume and clear catalysts.

There are two common routes:

1. Buying at the offering (IPO allocation): Some brokerage firms, including E*TRADE from Morgan Stanley, provide eligible customers the chance to request shares in the days ahead of the IPO. If you receive an allocation, your purchase is at the public offering price, rather than the price the stock may jump to—or fall from—after the first trade.
2. Buying after the first trade (aftermarket): If you do not receive an allocation, or if you prefer to wait and watch the first day unfold, you can buy shares once the stock begins trading on the open market. The tradeoff is that the market price can be meaningfully different from the IPO price, especially early on.

In both cases, it’s worth remembering that IPOs are “new” stocks: Trading history is limited, early price moves can be large, and the market may need time to settle on a consensus value.

IPOs can be attractive because they can offer:  

• Early access to innovative companies: IPOs can put you closer to the beginning of a company’s public-market growth story, when new products, new markets, and scaling revenue can drive attractive return potential over time.
• A shot at the offering price, if you receive shares: Investors who receive an allocation buy at the IPO price, rather than at an unpredictable aftermarket price once the stock begins trading.
• Portfolio diversification: Many portfolios end up concentrated in long-established names. IPOs may offer exposure to newer public companies whose performance drivers may differ from the most widely held stocks, particularly if new shares represent different equity sectors or investing styles. Just remember not to let any single IPO become too large a part of your portfolio.
• A chance to put a strategy to work: For active investors, IPOs offer a chance to plan: deciding in advance what price you are willing to pay, what would make you add or cut back, and what kind of position size fits your risk tolerance. The fact that the stock is “new” does not remove risk, but it can create clearer decision points.

The upside potential is why IPOs draw crowds. The tradeoffs are why it pays to know the rules of the road. Some potential drawbacks:

• Limited number of shares for investors seeking an IPO allocation: In popular offerings, demand can quickly outstrip supply. Even if you are eligible to buy at the offering and submit a conditional offer for an allocation, availability can be limited and participation is not guaranteed.
• Volatility: IPO shares often move sharply in the first days of trading as buyers and sellers set a market price, sometimes falling below the offering price.
• Speculative nature: IPOs typically involve companies that are smaller and newer, with limited operating histories, less experienced management teams, and fewer products or customers
• Consequences for selling too quickly: Brokerages that offer IPO allocations, including E*TRADE, have “anti-flipping” policies that discourage early resales and may limit your ability to receive future IPO allocations if you sell too soon. (Learn more about E*TRADE’s policy here.)
• Lockups later on: Insiders and early investors are often restricted from selling for a period of time, commonly about 180 days. When lockups expire, additional shares can become eligible for sale and may affect the share price.

If you’re considering requesting an IPO allocation or buying soon after trading begins, it’s essential to perform due diligence.

Start with the prospectus. Reviewing the prospectus is important in order to make informed investment decisions. Make sure you understand the basics, looking in particular for “risk factors,” plus information on how the business makes money, what competition looks like, and how the company plans to use the IPO proceeds.

Also look for any discussion of lockups and when additional shares may become eligible for sale, because those calendar dates can impact the share price weeks or months after the debut. 

For individual investors, IPOs can offer a convenient way to request shares at the offering price, and IPOs can be seen as exciting opportunities, but you should know what to expect and understand the risks: Allocations are not guaranteed, prices can fluctuate widely, and deal-specific restrictions matter. Know the process, read the prospectus, and match your approach to your risk tolerance.

Visit E*TRADE’s New Issue Center to sign up for alerts about upcoming deals offered by E*TRADE from Morgan Stanley.

CRC# 5385609  (04/2026)